How to have it all: Managing your business and a healthy pension
By Romi Savova
If you’re self-employed, you usually have to think more carefully about your finances than employed people. And when it comes to long-term savings products like pensions, things can be a lot more complex!
Long underserved by the pensions industry, the self-employed are missing out on the sizable benefit of Auto-Enrolment, the government legislation that requires all employers to enrol eligible staff into a workplace pension. As a self-employed worker you’re responsible for choosing your own pension, and saving everything you’ll need for a comfortable retirement. When you have to go it alone, the challenge of building up a substantial pension can seem daunting and, when you factor in the additional stresses of building your business, it’s no surprise that setting up a pension usually gets put on the back burner.
However, being self-employed doesn’t have to be a barrier to your savings journey. There’s plenty of simple actions you can take: here are five steps to get your pension savings back on track.
Look for a pension that suits your circumstances
Perhaps the most significant thing you can do, is look for a pension that’s made especially for self-employed savers. PensionBee’s brand new self-employed pension is one such product that’s been specially designed with sole traders and directors of limited companies in mind. Whether you have an existing workplace or private pension to consolidate or you’ve never saved towards your retirement, this flexible option allows you to pay into your pension according to your current income. There are no minimum contribution amounts, and it’s easy to make one-off or regular contributions via bank transfer or Direct Debit, from personal or business bank accounts, making saving as painless as possible.
Make the most of company and personal pension contributions
If you’re a self-employed worker who’s also the director of a limited company, you can pay employer contributions into your pension from your business bank account. Pension contributions are usually considered as an allowable business expense, which means these payments could be offset against your corporation tax bill. Your company won’t pay National Insurance on these pension contributions either, so you could make additional savings when you pay money from your company into your pension.
When it comes to your personal pension contributions, the government will usually provide tax relief as an incentive to save for later life. Basic rate taxpayers will usually get 20% tax relief, so if you paid £100 into your pension from a personal bank account, HMRC would effectively add another £25 in tax relief. Higher and additional rate taxpayers can claim further relief through their Self-Assessment tax returns.
Don’t leave any old savings behind
Another useful area to explore is previous workplace pension savings. Although you’re self-employed now, you may have had one or two jobs earlier in your career where you were enrolled in a workplace pension scheme. PensionBee’s ‘Do I have a pension?’ tool can help determine how likely you are to have an existing pension. You can then go on to track these savings through the government’s Pension Tracing Service. All you need is the name of your pension provider or former employer. Alternatively you could try contacting your old employers for help.
Check your State Pension entitlement
Whilst you’re doing this, it’s a good idea to check you’re on course to receive the full State Pension entitlement – which you find out using the government’s State Pension Tracker. Due to rising life expectancies and an ever-increasing State Pension age, there’s no guaranteeing what today’s youngest workers will receive by the time they retire. But at the moment all workers need to have paid National Insurance Contributions for at least 10 years to qualify for the State Pension. To receive the full amount of £9,110.40 a year (2020/21)* you’ll need to have paid contributions for at least 35 years.
Plan your saving with a pension calculator
Once you have an idea of any past savings or state entitlements, you can start to calculate how much further you have to go. It’s estimated most people will need about 70% of their salary to live comfortably in retirement, but the amount you’ll require largely depends on your circumstances and lifestyle. It’s crucial to think about how much you can afford to save, how long you’ve got until you want to retire and your desired retirement income. PensionBee’s pension calculator can help you crunch the numbers to give you a target savings amount and an indication of what your retirement could look like.
Putting these five simple steps into practice could transform your pension experience, alleviating much of the stress associated with self-employed pension saving and the confusion that surrounds retirement finances and planning.
Romi Savova is CEO at leading online pension provider PensionBee.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
*This rises to £9,337.80 in 2021/22, from 12 April.